OECD/G20 Base Erosion and Profit
Shifting Project
Countering Harmful Tax
Practices More Effectively,
Taking into Account
Transparency and Substance
ACTION 5: 2014 Deliverable
OECD/G20 Base Erosion and Profit Shifting Project
Countering Harmful
Tax Practices
More Effectively,
Taking into Account
Transparency
and Substance
This document and any map included herein are without prejudice to the status of
or sovereignty over any territory, to the delimitation of international frontiers and
boundaries and to the name of any territory, city or area.
Please cite this publication as:
OECD (2014), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency
and Substance, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing.
http://dx.doi.org/10.1787/9789264218970-en
ISBN 978-92-64-21885-7 (print)
ISBN 978-92-64-21897-0 (PDF)
Series: OECD/G20 Base Erosion and Profit Shifting Project
ISSN 2313-2604 (print)
ISSN 2313-2612 (online)
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FOREWORD – 3
Foreword
Addressing base erosion and profit shifting (BEPS) is a key priority of
governments around the globe. In 2013, OECD and G20 countries, working
together on an equal footing, adopted a 15-point Action Plan to address
BEPS. The Action Plan aims to ensure that profits are taxed where
economic activities generating the profits are performed and where value is
created. It was agreed that addressing BEPS is critical for countries and
must be done in a timely manner, not least to prevent the existing consensusbased international tax framework from unravelling, which would increase
uncertainty for businesses at a time when cross-border investments are more
necessary than ever. As a result, the Action Plan provides for 15 actions to
be delivered by 2015, with a number of actions to be delivered in 2014.
The OECD Committee on Fiscal Affairs (CFA), bringing together 44
countries on an equal footing (all OECD members, OECD accession
countries, and G20 countries), has adopted a first set of seven deliverables
described in the Action Plan and due in 2014. This report is part of these
deliverables and is an output of Action 5.
Developing countries and other non-OECD/non-G20 economies have
been extensively consulted through regional and global fora meetings and
their input has been fed into the work. Business representatives, trade
unions, civil society organisations and academics have also been very
involved through opportunities to comment on discussion drafts. These have
generated more than 3 500 pages of comments and were discussed at five
public consultation meetings and via three webcasts that attracted more than
10 000 viewers.
The first set of reports and recommendations, delivered in 2014,
addresses seven of the actions in the BEPS Action Plan published in July
2013. Given the Action Plan’s aim of providing comprehensive and
coherent solutions to BEPS, the proposed measures, while agreed, are not
yet formally finalised. They may be affected by some of the decisions to be
taken with respect to the 2015 deliverables with which the 2014 deliverable
will interact. They do reflect consensus, as of July 2014, on a number of
solutions to put an end to BEPS.
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
4 – FOREWORD
The adoption of this first set of deliverables and the implementation of
the relevant measures by national governments mean that: hybrid
mismatches will be neutralised; treaty shopping and other forms of treaty
abuse will be addressed; abuse of transfer pricing rules in the key area of
intangibles will be greatly minimised; and country-by-country reporting will
provide governments with information on the global allocation of the
profits, economic activity and taxes of MNEs. Equally, OECD and G20
countries have agreed upon a report concluding that it is feasible to
implement BEPS measures through a multilateral instrument. They have
also advanced the work to fight harmful tax practices, in particular in the
area of IP regimes and tax rulings. Finally, they have reached a common
understanding of the challenges raised by the digital economy, which will
now allow them to deepen their work in this area, one in which BEPS is
exacerbated.
By its nature, BEPS requires co-ordinated responses. This is why
countries are investing time and resources in developing shared solutions to
common problems. At the same time, countries retain their sovereignty over
tax matters and measures may be implemented in different countries in
different ways, as long as they do not conflict with countries’ international
legal commitments.
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
TABLE OF CONTENTS – 5
Table of contents
Abbreviations and acronyms .............................................................................7
Executive summary .............................................................................................9
Chapter 1.
Introduction and background ....................................................13
Chapter 2.
Overview of the OECD’s work on harmful tax practices ........15
Chapter 3.
Framework under the 1998 Report for determining
whether a regime is a harmful preferential regime ..................19
Chapter 4.
Revamp of the work on harmful tax practices ..........................27
A. Substantial activity requirement .................................................................27
B. Improving transparency through compulsory spontaneous exchange
on rulings related to preferential regimes ..................................................35
Chapter 5.
Review of member and associate country regimes ..................50
A. Introduction ................................................................................................55
B. Conclusions on sub-national regimes and when they are in scope .............56
C. Conclusions reached on regimes reviewed .................................................57
Chapter 6.
Next steps......................................................................................62
Annex A.
Spontaneous information exchange on rulings related to
preferential regimes – flow chart ...............................................65
Tables
Table 5.1. Regimes other than intangible regimes ..................................... 58
Table 5.2. Intangible regimes ..................................................................... 59
Table 5.3. Rulings related to preferential regimes and ruling regimes ....... 60
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
ABBREVIATIONS AND ACRONYMS – 7
Abbreviations and acronyms
AOA
Authorised OECD approach
APA
Advance pricing agreements
ATR
Advance tax rulings
BEPS
Base erosion and profit shifting
CAN
Consolidated application note (2004)
CFA
Committee on Fiscal Affairs
CFC
Controlled foreign company
EOI
Exchange of information
FHTP
Forum on Harmful Tax Practices
IP
Intellectual property
MAC
Convention on Mutual Administrative Assistance in Tax
Matters
OECD
Organisation
Development
PE
Permanent establishment
R&D
Research and development
TP
Transfer pricing
for
Economic
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
Co-operation
and
EXECUTIVE SUMMARY – 9
Executive summary
More than 15 years have passed since the publication of the OECD’s
1998 Report Harmful Tax Competition: An Emerging Global Issue but the
underlying policy concerns expressed in the 1998 Report as regards the
“race to the bottom” on the mobile tax base have not lost their relevance. In
certain areas, current concerns may be less about traditional ring-fencing but
instead relate to across the board corporate tax rate reductions on particular
types of income. The fact that preferential regimes continue to be a pressure
area is highlighted by their inclusion in Addressing Base Erosion and Profit
Shifting (BEPS Report) and Action Plan on Base Erosion and Profit Shifting
(BEPS Action Plan).
To counter harmful tax practices more effectively, taking into account
transparency and substance, Action Item 5 of the BEPS Action Plan
commits the Forum on Harmful Tax Practices (FHTP) to:
“Revamp the work on harmful tax practices with a priority on
improving transparency, including compulsory spontaneous
exchange on rulings related to preferential regimes, and on
requiring substantial activity for any preferential regime. It will take
a holistic approach to evaluate preferential tax regimes in the BEPS
context. It will engage with non-OECD members on the basis of the
existing framework and consider revisions or additions to the
existing framework.”
Under Action Item 5, the FHTP is to deliver three outputs: first,
finalisation of the review of member country preferential regimes; second, a
strategy to expand participation to non-OECD member countries; and, third,
consideration of revisions or additions to the existing framework.
This report outlines the progress made on the delivery of these outputs
under Action 5. It shows progress made and identifies the next steps towards
completion of this work, in particular on the first output. As regards the
review of the existing preferential regimes, the emphasis has been put on
(i) elaborating a methodology to define a substantial activity requirement in
the context of intangible regimes and (ii) improving transparency through
compulsory spontaneous exchange on rulings related to preferential regimes.
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
10
– EXECUTIVE SUMMARY
Finally, it provides a progress report on the review of the regimes of OECD
member and associate countries in the OECD/G20 Project on BEPS
(associate countries)1.
Countries have agreed on the need to strengthen the substantial activity
requirement and several approaches have been explored with the common
goal of realigning taxation of profits with substantial activities. Discussions
are continuing to agree an approach, and once the approach has been agreed,
the preferential regimes identified in this report will be assessed. As regards
transparency, a detailed framework has been developed and agreed and is set
out in the report. The agreed framework will be applied to the preferential
regimes identified in this report and to other preferential regimes. Finally,
the FHTP has started reviewing regimes of member and associate countries.
The review of associate country regimes takes place on an equal footing
with the review of member country regimes, but more time is being allowed
for the completion of the review for associate country regimes.
This report contains six chapters. Chapter 1 introduces Action Item 5 of
the BEPS Action Plan and covers background on the 1998 Report. Chapter 2
gives an overview of the OECD’s work on harmful tax practices. Chapter 3
sets out the framework under the 1998 Report for determining whether a
regime is a harmful preferential regime. Chapter 4 describes progress by the
FHTP on the requirements of Action Item 5 to revamp the work on harmful
tax practices by requiring substantial activity for any preferential regime. It
also contains the agreed framework for improving transparency, including
compulsory spontaneous exchange on rulings related to preferential regimes.
Chapter 5 presents the status of the review of member country regimes and
the progress made on the review of preferential regimes of associate
countries. Finally, Chapter 6 deals with next steps.
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
EXECUTIVE SUMMARY – 11
Note
1.
The following are associate countries in the OECD/G20 Project on BEPS:
Argentina, Brazil, China, Colombia, India, Indonesia, Latvia, Russia,
Saudi Arabia and South Africa.
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
1. INTRODUCTION AND BACKGROUND – 13
Chapter 1
Introduction and background
At its June 2013 meeting, the Committee on Fiscal Affairs (CFA)
approved the BEPS Action Plan (OECD, 2013a) which was subsequently
endorsed by the G20 Finance Ministers at their July 2013 meeting and by
the G20 Leaders at their September 2013 meeting. In response to the call in
the BEPS Report (OECD, 2013b) to develop “solutions to counter harmful
regimes more effectively, taking into account factors such as transparency
and substance”1, Action Item 5 of the BEPS Action Plan commits the FHTP
to the following2:
“Revamp the work on harmful tax practices with a priority on
improving transparency, including compulsory spontaneous
exchange on rulings related to preferential regimes, and on
requiring substantial activity for any preferential regime. It will take
a holistic approach to evaluate preferential tax regimes in the BEPS
context. It will engage with non-OECD members on the basis of the
existing framework and consider revisions or additions to the
existing framework.”
As is clear from Action Item 5, work in this area is not new. In 1998, the
OECD published the report Harmful Tax Competition: An Emerging Global
Issue (OECD, 1998). This report laid the foundations for the OECD’s work
in the area of harmful tax practices and created the FHTP to take forward
this work. It was published in response to a request by Ministers to develop
measures to counter harmful tax practices with respect to geographically
mobile activities, such as financial and other service activities, including the
provision of intangibles. The nature of those types of activities makes it very
easy to shift them from one country to another. Globalisation and
technological innovation have further enhanced that mobility. The goal of
the OECD’s work in the area of harmful tax practices is to secure the
integrity of tax systems by addressing the issues raised by regimes that apply
to mobile activities and that unfairly erode the tax bases of other countries,
potentially distorting the location of capital and services. Such practices can
also cause undesired shifts of part of the tax burden to less mobile tax bases,
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
14
– 1. INTRODUCTION AND BACKGROUND
such as labour, property, and consumption, and increase administrative costs
and compliance burdens on tax authorities and taxpayers.
The work on harmful tax practices is not intended to promote the
harmonisation of income taxes or tax structures generally within or outside
the OECD, nor is it about dictating to any country what should be the
appropriate level of tax rates. Rather, the work is about reducing the
distortionary influence of taxation on the location of mobile financial and
service activities, thereby encouraging an environment in which free and fair
tax competition can take place. This is essential in moving towards a “level
playing field” and a continued expansion of global economic growth.
Countries have long recognised that a “race to the bottom” would ultimately
drive applicable tax rates on certain sources of income to zero for all
countries, whether or not this is the tax policy a country wishes to pursue
and combating harmful tax practices is an interest common to OECD and
non-OECD member countries alike. There are obvious limitations to the
effectiveness of unilateral actions against such practices. By agreeing a set
of common criteria and promoting a co-operative framework, the work not
only supports the effective fiscal sovereignty of countries over the design of
their tax systems but it also enhances the ability of countries to react against
the harmful tax practices of others.
More than 15 years have passed since the publication of the 1998 Report
but the underlying policy concerns expressed in the 1998 Report have not
lost their relevance. In certain areas, current concerns may be less about
traditional ring-fencing but instead relate to across the board corporate tax
rate reductions on particular types of income (such as income from financial
activities or from the provision of intangibles). The fact that preferential
regimes continue to be a pressure area is highlighted by their inclusion in the
BEPS Report3 and Action Item 5 of the BEPS Action Plan4.
Under Action Item 5, the FHTP is to deliver the following three outputs:
• First, finalisation of the review of member country preferential
regimes;
• Second, a strategy to expand participation to non-OECD member
countries;
• Third, consideration of revisions or additions to the existing
framework.
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
1. INTRODUCTION AND BACKGROUND – 15
Notes
1.
See Chapter 5 of the BEPS Report - Addressing concerns related to base
erosion and profit shifting, p. 53.
2.
See Action 5 of the BEPS Action Plan - Counter harmful tax practices
more effectively, taking into account transparency and substance, p. 18.
3.
See Chapter 5 of the BEPS Report - Addressing concerns related to base
erosion and profit shifting, p. 48.
4.
See Action 5 of the BEPS Action Plan - Counter harmful tax practices
more effectively, taking into account transparency and substance, p. 17.
Bibliography
OECD (2013a), Action Plan on Base Erosion and Profit Shifting, OECD
Publishing.
http://dx.doi.org/10.1787/9789264202719-en
OECD (2013b), Addressing Base Erosion and Profit Shifting, OECD
Publishing.
http://dx.doi.org/10.1787/9789264192744-en
OECD (1998), Harmful Tax Competition: An Emerging Global Issue,
OECD Publishing.
http://dx.doi.org/10.1787/9789264162945-en
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
2. OVERVIEW OF THE OECD’S WORK ON HARMFUL TAX PRACTICES – 17
Chapter 2
Overview of the OECD’s work on harmful tax practices
The 1998 Report (OECD, 1998) divided the work on harmful tax
practices into three areas: (a) preferential regimes in OECD member
countries, (b) tax havens and (c) non-OECD economies. The 1998 Report
set out four key factors and eight other factors to determine whether a
preferential regime is potentially harmful1 and four key factors used to
define “tax havens”2. The 1998 Report was followed by four progress
reports:
1. The first report, issued in June (OECD, 2000), outlined the progress
made and, among other things, identified 47 potentially harmful
regimes within OECD member countries as well as 35 jurisdictions
found to have met the tax haven criteria (in addition to the
6 jurisdictions meeting the criteria that had made advance
commitments to eliminate harmful tax practices).
2. A second progress report was released in 2001 (OECD, 2001). It
made several important modifications to the tax haven aspect of the
work. Most importantly, it provided that in determining which
jurisdictions would be considered as uncooperative tax havens,
commitments would be sought only with respect to the principles of
effective exchange of information and transparency.
3. Between 2000 and 2004, generic guidance, or “application”, notes
were developed to assist member countries in reviewing existing or
future preferential regimes and in assessing whether any of the
factors in the 1998 Report are present. Application notes were
developed on transparency and exchange of information,
ring-fencing, transfer pricing, rulings, holding companies, fund
management, and shipping. The separate application notes were
combined into a single Consolidated Application Note (CAN,
OECD, 2004a).
4. In early 2004, the OECD issued another report (OECD, 2004b)
which focused mainly on the progress made with respect to
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
18 – 2. OVERVIEW OF THE OECD’S WORK ON HARMFUL TAX PRACTICES
eliminating harmful aspects of preferential regimes in OECD
member countries. In addition to the 47 regimes identified in 2000,
the report included determinations on holding companies and
similar preferential regimes. A number of regimes that had been
introduced since the initial identification of potentially harmful
regimes in 2000 were also considered but none of these regimes
were found to be harmful within the meaning of the 1998 Report.
5. Finally, a report on member country preferential regimes was issued
in September 2006 (OECD, 2006). Of the 47 regimes initially
identified as potentially harmful in the 2000 Report, 46 were
abolished, amended or found not to be harmful following further
analysis. Only one preferential regime was found to be actually
harmful and legislation was subsequently enacted by the relevant
country to abolish this regime.
Over time, the work relating to the tax haven aspects was increasingly
carried out through the Global Forum on Taxation (Global Forum), which
was created in the early 2000s to engage in a dialogue with non-OECD
member countries on tax issues. The jurisdictions that had committed to the
principles of effective exchange of information on request and transparency
were invited to participate in the Global Forum, along with OECD member
countries, to further articulate the principles of effective exchange of
information on request and transparency and to ensure their implementation.
In 2002, the Global Forum developed the Agreement on Exchange of
Information in Tax Matters (OECD, 2002), and in 2005 it agreed standards
on transparency relating to availability and reliability of information. Since
2006, the Global Forum has published annual assessments of progress in
implementing the standards3.
In September 2009, the Global Forum was renamed the Global Forum
on Transparency and Exchange of Information for Tax Purposes, and was
restructured to expand its membership and its mandate and to improve its
governance4. Subsequently, the CFA decided to restructure the bodies
responsible for Exchange of Information (EOI) by creating Working Party
No. 10 on Exchange of Information and Tax Compliance to take over the
responsibilities of Working Party No. 8 on Tax Avoidance and Evasion, as
well as the EOI matters previously addressed by the FHTP. Going forward,
the work of the FHTP therefore focused on preferential tax regimes and on
defensive measures in respect of such regimes (other than any such
measures related to a lack of EOI or transparency5).
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
2. OVERVIEW OF THE OECD’S WORK ON HARMFUL TAX PRACTICES – 19
Notes
1.
Those factors and the process for determining whether a regime is a
harmful preferential regime under the framework of the 1998 Report are
described below under Chapter 3, Section B.
2.
The four key factors to define a “tax haven” were: 1) no or nominal tax
on the relevant income; 2) lack of effective exchange of information;
3) lack of transparency; 4) no substantial activities. No or nominal tax is
not sufficient in itself to classify a jurisdiction as a tax haven.
3.
The relevant reports can be accessed on the following webpage:
www.oecd.org/tax/transparency/keypublications.htm.
4.
Information on the Global Forum on Transparency and Exchange of
Information for Tax Purposes and its work is available at:
www.oecd.org/tax/transparency.
5.
Defensive measures related to a lack of exchange of information or
transparency fall within the mandate of Working Party No. 10.
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20 – 2. OVERVIEW OF THE OECD’S WORK ON HARMFUL TAX PRACTICES
Bibliography
OECD (2006), The OECD’s Project on Harmful Tax Practices: 2006
Update on Progress in Member Countries, OECD, Paris.
www.oecd.org/ctp/harmful/37446434.pdf
OECD (2004a), Consolidated Application Note: Guidance in Applying the
1998 Report to Preferential Tax Regimes, OECD, Paris.
www.oecd.org/ctp/harmful/30901132.pdf
OECD (2004b), Harmful Tax Practices: The 2004 Progress Report, OECD,
Paris.
www.oecd.org/ctp/harmful/30901115.pdf
OECD (2002), Agreement on Exchange of Information in Tax Matters,
OECD Publishing.
http://dx.doi.org/10.1787/9789264034853-en
OECD (2001), The OECD’s Project on Harmful Tax Practices: The 2001
Progress Report, OECD, Paris.
www.oecd.org/ctp/harmful/2664438.pdf
OECD (2001), Towards Global Tax Co-operation: Progress in Identifying
and Eliminating Harmful Tax Practices, OECD Publishing.
http://dx.doi.org/10.1787/9789264184541-en
OECD (1998), Harmful Tax Competition: An Emerging Global Issue,
OECD Publishing.
http://dx.doi.org/10.1787/9789264162945-en
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
3. DETERMINING WHETHER A REGIME IS A HARMFUL PREFERENTIAL REGIME – 21
Chapter 3
Framework under the 1998 Report for determining whether a
regime is a harmful preferential regime
This Chapter describes the framework under the 1998 Report
(OECD, 1998) for determining whether a regime is a harmful preferential
regime. This involves three stages:
a) Consideration of whether a regime is within the scope of work of
the FHTP and whether it is preferential;
b) Consideration of the four key factors and eight other factors set out
in the 1998 Report to determine whether a preferential regime is
potentially harmful; and
c) Consideration of the economic effects of a regime to determine
whether a potentially harmful regime is actually harmful.
a) Consideration of whether a regime is within the scope of work of
the FHTP and whether it is preferential
Scope of work of the FHTP
To be within the scope of the 1998 Report, the regime must, firstly,
apply to income from geographically mobile activities, such as financial and
other service activities, including the provision of intangibles. Preferential
regimes designed to attract investment in plant, building and equipment are
outside the scope of the 1998 Report1.
Secondly, the regime must relate to the taxation of the relevant income
from geographically mobile activities. Hence, the work is mainly concerned
with business taxation. Consumption taxes are explicitly excluded2.
Business taxes may be levied at national, federal or central government level
(“national taxes”) and/or at sub-national, sub-federal or decentralised level
(“sub-national taxes”). Sub-national taxes include taxes levied at state,
regional, provincial or local level. In the course of the current review, the
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22 – 3. DETERMINING WHETHER A REGIME IS A HARMFUL PREFERENTIAL REGIME
question arose as to whether regimes offering tax benefits at sub-national
level alone (sub-national regimes) are within the scope of the FHTP’s work.
This is discussed under Chapter 5, Section B. below.
Preferential tax treatment
In order for a regime to be considered preferential, it must offer some
form of tax preference in comparison with the general principles of taxation
in the relevant country. A preference offered by a regime may take a wide
range of forms, including a reduction in the tax rate or tax base or
preferential terms for the payment or repayment of taxes. Even a small
amount of preference is sufficient for the regime to be considered
preferential. The key point is that the regime must be preferential in
comparison with the general principles of taxation in the relevant country,
and not in comparison with principles applied in other countries. For
example, where the rate of corporate tax applied to all income in a particular
country is 10%, the taxation of income from mobile activities at 10% is not
preferential, even though it may be lower than the rate applied in other
countries.
b) Consideration of the four key factors and eight other factors set
out in the 1998 Report to determine whether a preferential regime is
potentially harmful
Four key factors and eight other factors are used to determine whether a
preferential regime within the scope of the FHTP’s work is potentially
harmful3. A reference to substantial activity is already included in the eight
other factors so this is not a new concept. The eight other factors generally
help to spell out, in more detail, some of the key principles and assumptions
that should be considered in applying the key factors themselves.
The four key factors are:
1. The regime imposes no or low effective tax rates on income from
geographically mobile financial and other service activities.
2. The regime is ring-fenced from the domestic economy.
3. The regime lacks transparency (for example, the details of the
regime or its application are not apparent, or there is inadequate
regulatory supervision or financial disclosure).
4. There is no effective exchange of information with respect to the
regime4.
The eight other factors are:
1. An artificial definition of the tax base.
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3. DETERMINING WHETHER A REGIME IS A HARMFUL PREFERENTIAL REGIME – 23
2. Failure to adhere to international transfer pricing principles.
3. Foreign source income exempt from residence country taxation.
4. Negotiable tax rate or tax base.
5. Existence of secrecy provisions.
6. Access to a wide network of tax treaties.
7. The regime is promoted as a tax minimisation vehicle.
8. The regime encourages operations or arrangements that are purely
tax-driven and involve no substantial activities.
In order for a regime to be considered potentially harmful, the first key
factor, ‘no or low effective tax rate’, must apply. This is a gateway criterion.
Where a regime offers tax benefits at both national and sub-national level,
the question of whether the regime meets the low or no effective tax rate
factor is, generally, determined based on the combined effective tax rate for
both the national and sub-national levels. The reduction in national taxes
alone may, in some cases, be considered sufficient to determine that entities
benefiting from the regime are subject to a low or no effective tax rate. The
application of the no or low effective tax rate factor to regimes offering tax
benefits at sub-national level alone is discussed under Chapter 5, Section B
below.
Where a regime meets the no or low effective tax rate factor, an
evaluation of whether that regime is potentially harmful should be based on
an overall assessment of each of the other three ‘key factors’ and, where
relevant, the eight ‘other factors’. Where low or zero effective taxation and
one or more of the remaining factors apply, a regime will be characterised as
potentially harmful.
c) Consideration of the economic effects of a regime to determine
whether a potentially harmful regime is actually harmful
A regime that has been identified as being potentially harmful based on
the above factor analysis may be considered not to be actually harmful if it
does not appear to have created harmful economic effects.
The following three questions can be helpful in making this assessment:
• Does the tax regime shift activity from one country to the country
providing the preferential tax regime, rather than generate significant
new activity?
• Is the presence and level of activities in the host country
commensurate with the amount of investment or income?
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24 – 3. DETERMINING WHETHER A REGIME IS A HARMFUL PREFERENTIAL REGIME
• Is the preferential regime the primary motivation for the location of
an activity5?
Following consideration of its economic effects, a regime that has
created harmful effects will be categorised as a harmful preferential regime.
Where a preferential regime has been found to be actually harmful, the
relevant country is given the opportunity to abolish the regime or remove the
features that create the harmful effect. Other countries may take defensive
measures to counter the effects of the harmful regime, while at the same
time continuing to encourage the country applying the regime to modify or
remove it6. It is recognised that countries’ defensive measures may also
apply in situations which do not involve harmful preferential regimes as
defined in the 1998 Report. The 1998 Report does not affect countries’ right
to use such measures in such situations7.
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3. DETERMINING WHETHER A REGIME IS A HARMFUL PREFERENTIAL REGIME – 25
Notes
1.
See paragraph 6 of 1998 Report, p. 8.
2.
See paragraph 7 of 1998 Report, p. 8.
3.
See paragraphs 59-79 of 1998 Report, pp. 25-34.
4.
Note that in assessing transparency and effective exchange of
information factors, the FHTP looks specifically at how a particular
regime measures up against those factors. It does not attempt to revisit
the work of the Global Forum, which has a broader and more general
focus on transparency and effective exchange of information more
generally. However, to the extent that the work of the Global Forum
highlights certain issues with respect to a particular regime, these are
taken into account in the FHTP’s evaluations.
5.
See paragraphs 80-84 of 1998 Report for more details on each of those
questions, pp. 34-35.
6.
See paragraph 96 of 1998 Report, p. 40.
7.
See paragraph 98 of 1998 Report which states this principle with respect
to CFC rules specifically, p. 41.
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26 – 3. DETERMINING WHETHER A REGIME IS A HARMFUL PREFERENTIAL REGIME
Bibliography
OECD (1998), Harmful Tax Competition: An Emerging Global Issue,
OECD Publishing.
http://dx.doi.org/10.1787/9789264162945-en
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4. REVAMP OF THE WORK ON HARMFUL TAX PRACTICES – 27
Chapter 4
Revamp of the work on harmful tax practices
To counter harmful regimes more effectively, Action Item 5 of the
BEPS Action Plan (OECD, 2013a) requires the FHTP to revamp the work
on harmful tax practices, with a priority and renewed focus on requiring
substantial activity for any preferential regime and on improving
transparency, including compulsory spontaneous exchange on rulings
related to preferential regimes. This Chapter describes the work carried out
by the FHTP in these two priority areas.
A. Substantial activity requirement
1. Introduction
Action Item 5 specifically requires substantial activity for any
preferential regime. Seen in the wider context of the work on BEPS, this
requirement contributes to the second pillar of the Base Erosion and Profit
Shifting (BEPS) project, which is to align taxation with substance by
ensuring that taxable profits can no longer be artificially shifted away from
the countries where value is created. The framework set out in the
1998 Report (OECD, 1998) already contains a substantial activity
requirement. This requirement is grounded in particular in the twelfth factor
(i.e. the eighth other factor) set out in the 1998 Report. This factor looks at
whether a regime “encourages purely tax-driven operations or
arrangements” and states that “many harmful preferential tax regimes are
designed in a way that allows taxpayers to derive benefits from the regime
while engaging in operations that are purely tax-driven and involve no
substantial activities”. The 1998 Report contains limited guidance on how to
apply this factor.
The substantial activity factor has been elevated in importance under
Action Item 5, which mandates that this factor be elaborated in the context
of BEPS. This factor will then be considered along with the four key factors
when determining whether a preferential regime within the scope of the
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FHTP’s work is potentially harmful. The FHTP is therefore considering
various approaches to applying the “substantial activity” factor for the
purposes of its work. The FHTP’s work on substantial activity has focused
in the first instance on what this would require in the context of regimes
which provide a preferential tax treatment for certain income arising from
qualifying Intellectual Property (“intangible regimes” or “IP regimes”).
There is a clear link between this work and statements in the BEPS Action
Plan that current concerns in the area of harmful tax practices may be less
about traditional ring-fencing and instead relate to corporate tax rate
reductions on particular types of income, such as income from the provision
of intangibles1. All intangible regimes in member countries are being
reviewed at the same time as part of the current review and none of these
regimes had been reviewed as part of the earlier work. The elaborated
substantial activity requirement can therefore be applied without needing to
re-assess intangible regimes previously reviewed. Under Action Item 5, the
substantial activity requirement applies to all preferential regimes within
scope, including preferential regimes other than IP regimes, and the FHTP
will also consider this aspect.
2. Substantial activity requirement in the context of intangible
regimes
Regimes that provide for a tax preference on income relating to
intangible property raise the base-eroding concerns that are the focus of the
FHTP’s work. At the same time, it is recognised that IP-intensive industries
are a key driver of growth and employment and that countries are free to
provide tax incentives for Research and Development (R&D) activities,
provided that they are granted according to the principles agreed by the
FHTP.
The FHTP considered three different approaches to requiring substantial
activities in an IP regime. Discussions about the specific approach to choose
are ongoing with much progress having been made already. The continuing
discussions are focused on reaching consensus on an approach to requiring
substantial activities as soon as possible. The first approach was a value
creation approach that required taxpayers to undertake a set number of
significant development activities. This approach did not have any support
over the other two. The second approach was a transfer pricing approach
that would allow a regime to provide benefits to all the income generated by
the IP if the taxpayer had located a set level of important functions in the
jurisdiction providing the regime, if the taxpayer is the legal owner of the
assets giving rise to the tax benefits and uses the assets giving rise to the tax
benefits, and if the taxpayer bears the economic risks of the assets giving
rise to the tax benefits. A few countries supported the transfer pricing
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approach, suggesting that it was consistent with international tax principles,
and they expressed concerns with the nexus approach, including questions
about its compatibility with European Union law etc. Many countries raised
a number of concerns with the transfer pricing approach, which is why the
work of the FHTP did not focus further on this approach. The third approach
was the nexus approach.
This approach looks to whether an IP regime makes its benefits
conditional on the extent of R&D activities of taxpayers receiving benefits.
The approach seeks to build on the basic principle underlying R&D credits
and similar “front-end” tax regimes that apply to expenditures incurred in
the creation of IP. Under these front-end regimes, the expenditures and
benefits are directly linked because the expenditures are used to calculate
the tax benefit. The nexus approach extends this principle to apply to
“back-end” tax regimes that apply to the income earned after the creation
and exploitation of the IP. Thus, rather than limiting jurisdictions to IP
regimes that only provide benefits directly to the expenditures incurred to
create the IP, the nexus approach also permits jurisdictions to provide
benefits to the income arising out of that IP – so long as there is a direct
nexus between the income receiving benefits and the expenditures
contributing to that income. This focus on expenditures aligns with the
underlying purpose of IP regimes by ensuring that the regimes that are
intended to encourage R&D activity only provide benefits to taxpayers that
in fact engage in such activity.
Expenditures therefore act as a proxy for substantial activities. It is not
the amount of expenditures that acts as a direct proxy for the amount of
activities. It is instead the proportion of expenditures directly related to
development activities that demonstrates real value added by the taxpayer
and acts as a proxy for how much substantial activity the taxpayer
undertook. The nexus approach applies a proportionate analysis to income,
under which the proportion of income that may benefit from an IP regime is
the same proportion as that between qualifying expenditures and overall
expenditures. In other words, the nexus approach allows a regime to provide
for a preferential rate on IP-related income to the extent it was generated by
qualifying expenditures. The purpose of the nexus approach is to grant
benefits only to income that arises from IP where the actual R&D activity
was undertaken by the taxpayer itself. This goal is achieved by defining
“qualifying expenditures” in such a way that they effectively prevent mere
capital contribution or expenditures for substantial R&D activity by parties
other than the taxpayer from qualifying the subsequent income for benefits
under an IP regime.
If a company only had one IP asset and had itself incurred all of the
expenditures to develop that asset, the nexus approach would simply allow
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all of the income from that IP asset to qualify for benefits. Once a
company’s business model becomes more complicated, however, the nexus
approach also by necessity becomes more complicated, because the
approach must determine a nexus between multiple strands of income and
expenditure, only some of which may be qualifying expenditures. In order to
address this complexity, the nexus approach apportions income according to
a ratio of expenditures. The nexus approach determines what income may
receive tax benefits by applying the following calculation:
x
=
Jurisdictions could treat this calculation as a rebuttable presumption. In
the absence of other information from a taxpayer, a jurisdiction would
determine the income receiving tax benefits based on the calculation above.
Taxpayers would, however, have the ability to prove, in certain
circumstances to be defined in further guidance being developed by the
FHTP, that more income should be permitted to benefit from the IP regime
if they could show a direct link between that income and qualifying
expenditures to develop the IP asset. This version of the nexus approach
may require greater record-keeping on the part of taxpayers, and
jurisdictions may need to establish notification and monitoring procedures.
Difficulties may arise around how to establish the direct linkage between
expenditures and income, but it could ensure that taxpayers that engaged in
greater value creating activity than is reflected in the calculation above
would be permitted to have more income benefit from the IP regime.
Jurisdictions that did decide to adopt this version would still use the
calculation above to establish the presumed amount of income that could
qualify for tax benefits.
Where the amount of income receiving benefits under an IP regime does
not exceed the amount determined by the nexus approach, the regime has
met the substantial activities requirement. The remainder of this section
provides further guidance on the application of the nexus approach and the
above calculation.
A.
Qualifying taxpayers
Qualifying taxpayers would include resident companies, domestic
Permanent Establishments (PE) of foreign companies, and foreign PEs of
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resident companies that are subject to tax in the jurisdiction providing
benefits. The expenditures incurred by a PE cannot qualify income earned
by the head office as qualifying income if the PE is not operating at the time
that income is earned2.
B.
IP assets
Under the nexus approach as contemplated, the only IP assets that could
qualify for tax benefits under an IP regime are patents and other IP assets
that are functionally equivalent to patents if those IP assets are both legally
protected and subject to similar approval and registration processes, where
such processes are relevant. The nexus approach focuses on establishing a
nexus between expenditures, these IP assets, and income3. Under the nexus
approach, marketing-related IP assets such as trademarks cannot qualify for
tax benefits under an IP regime.
C.
Qualifying expenditures
Qualifying expenditures must have been incurred by a qualifying
taxpayer, and they must be directly connected to the IP asset. Jurisdictions
will provide their own definitions of qualifying expenditures, and such
definitions must ensure that qualifying expenditures only include
expenditures that are necessary for actual R&D activities. They would
include the types of expenditures currently granted R&D credits under the
tax laws of multiple jurisdictions4. They would not include interest
payments, building costs, acquisition costs, or any costs that could not be
directly linked to a specific IP asset5.
D.
Overall expenditures
Overall expenditures should be defined in such a way that, if the
qualifying taxpayer incurred all relevant expenditures itself, the ratio would
allow 100% of the income from the IP asset to benefit from the preferential
regime. This means that overall expenditures must be the sum of all
expenditures that would count as qualifying expenditures if they were
undertaken by the taxpayer itself. This in turn means that anything that
would not be included in qualifying expenditures even if incurred by the
taxpayer itself (e.g., interest payments, building costs, acquisition costs, and
other costs that do not represent actual R&D activities) cannot be included
in overall expenditures and hence does not affect the amount of income that
may benefit from an IP regime. IP acquisition costs are an exception, since
they are included in overall expenditures and not in qualifying expenditures.
Their exclusion is consistent with the principle of what is included in overall
expenditures, however, because they are a proxy for expenditures incurred
by a non-qualifying taxpayer. Overall expenditures therefore include all
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qualifying expenditures, acquisition costs, and expenditures for outsourcing
that do not count as qualifying expenditures.
Often, overall expenditures will be incurred prior to the production of
income that could qualify for benefits under the IP regime. The nexus
approach is an additive approach, and the calculation requires both that
“qualifying expenditures” include all qualifying expenditures incurred by
the taxpayer over the life of the IP asset and that “overall expenditures”
include all overall expenditures incurred over the life of the IP asset. These
numbers will therefore increase every time a taxpayer incurs an expenditure
that would qualify for either category. The proportion of the cumulative
numbers will then determine the percentage to be applied to overall income
earned each year.
E.
Overall income
Jurisdictions will define “overall income” consistent with their domestic
laws on income definition. The definition that they choose should comply
with the following principles:
Overall income should be limited to IP income: Overall income should
only include income that is derived from the IP asset. This may include
royalties, capital gains and other income from the sale of an IP asset, and
embedded IP income from the sale of products directly related to the
IP asset.
Income benefiting from the regime should be proportionate: Overall
income should be defined in such a way that the income that benefits from
the regime is not disproportionately high given the percentage of qualifying
expenditures undertaken by qualifying taxpayers. This means that overall
income should not be defined as the gross income from the IP asset, since
such a definition could allow 100% of the net income of qualifying
taxpayers to benefit even when those taxpayers had not incurred 100% of
qualifying expenditures. Overall income should instead be adjusted by
subtracting IP expenditures allocable to IP income and incurred in the year
from gross IP income earned in the year6.
F.
Outsourcing7
The nexus approach is intended to ensure that, in order for a significant
proportion of IP income to qualify for benefits, a significant proportion of
the actual R&D activities must have been undertaken by the qualifying
taxpayer itself. The nexus approach would allow all qualifying expenditures
for activities undertaken by unrelated parties – whether or not they were
within the jurisdiction – to qualify, while all expenditures for activities
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undertaken by related parties – again, whether or not they were within the
jurisdiction – would not count as qualifying expenditures8.
As a matter of business practice, unlimited outsourcing to unrelated
parties should not provide many opportunities for taxpayers to receive
benefits without themselves engaging in substantial activities because, while
a company may outsource the full spectrum of R&D activities to a related
party, the same is typically not true of an unrelated party. Since the vast
majority of the value of an IP asset rests in both the R&D undertaken to
create it and the information necessary to undertake such R&D, it is unlikely
that a company will outsource the fundamental value-creating activities to
an unrelated party, regardless of where that unrelated party is located9.
Allowing only expenditures incurred by unrelated parties to be treated as
qualifying expenditures thus achieves the goal of the nexus approach to only
grant tax benefits to income arising from the substantive R&D activities in
which the taxpayer itself engaged that contributed to the income.
Jurisdictions could narrow the definition of unrelated parties to include only
universities, hospitals, R&D centres and non-profit entities that were
unrelated to the qualifying taxpayer. Where a payment is made through a
related party to an unrelated party without any margin, the payment will be
included in qualifying expenditures.
Jurisdictions could also only permit unrelated outsourcing up to a certain
percentage or proportion (while still excluding outsourcing to related parties
from the definition of qualifying expenditures). As explained above,
business realities typically mean that a company will not outsource more
than an insubstantial amount of R&D activities to an unrelated party, so both
a prohibition on outsourcing to any related parties and that same prohibition
combined with a cap that prohibits outsourcing to unrelated parties beyond
an insubstantial amount should have the equivalent effect of limiting
qualifying expenditures to those expenditures incurred to support
fundamental R&D activities by the taxpayer.
G.
Treatment of acquired IP
The basic principle underlying the treatment of acquired IP by the nexus
approach is that only the expenditures incurred for improving the IP asset
after it was acquired should be treated as qualifying expenditures. In order to
achieve this, the nexus approach would exclude acquisition costs from the
definition of qualifying expenditures, as mentioned above, and only allow
expenditures incurred after acquisition to be treated as qualifying
expenditures. Acquisition costs would, however, be included in overall
expenditures. Acquisition costs (or, in the case of licensing, royalties or
license fees) are a proxy for overall expenditures incurred prior to
acquisition. Therefore, no expenditures incurred by any party prior to
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acquisition will be included in either qualifying expenditures or overall
expenditures.
H.
Tracking of income and expenditures
Since the nexus approach depends on there being a nexus between
expenditures and income, it requires jurisdictions wishing to introduce an
IP regime to mandate that taxpayers that want to benefit from an IP regime
must track expenditures, IP assets, and income to ensure that the income
receiving benefits did in fact arise from the expenditures that qualified for
those benefits. If a taxpayer has only one IP asset that it has fully
self-developed and that provides all of its income, this tracking should be
fairly simple, since all qualifying expenditures incurred by that company
will determine the benefits to be granted to all the IP income earned by that
company. Once a company has more than one IP asset or engages in any
degree of outsourcing or acquisition, however, tracking becomes essential.
Tracking must also ensure that taxpayers have not manipulated the amount
of overall expenditures to inflate the amount of income that may benefit
from the regime.
This means that taxpayers will need to be able to track the link between
expenditures and income and provide evidence of this to their tax
administrations. Jurisdictions will therefore need to establish a reasonable
tracking method based on consistent criteria capable of objective
measurement. This could take the form of, for example, research codes
identifying the purpose of individual research expenditures or descriptions
of research expenditures. Not engaging in such tracking will not prevent
taxpayers from earning IP income in a jurisdiction, but it will prevent them
from benefiting from a preferential IP regime.
The main complexity associated with tracking arises from the fact that a
preferential rate is applied to certain IP income, which is a function of the
regime rather than the nexus approach, and existing IP regimes suggest that
taxpayers are willing to comply with certain often complex requirements
when an optional tax benefit is made conditional on such requirements.
Because the nexus approach will standardise the requirements of IP regimes
across jurisdictions, it may in the long term reduce the overall complexity
that taxpayers that are benefiting from multiple IP regimes currently face.
Financial accounting often already requires tracking of IP income and
expenditures on a project-by-project basis. It is recognised that the existing
systems may not fully support the requirements of the nexus approach and
that it may take time to set up systems that do support these requirements.
The FHTP recognises that discussions with business would be necessary.
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I.
Grandfathering
Consistent with the work so far in the area of harmful tax practices, the
FHTP will draft further guidance on grandfathering, building in particular
on paragraph 12 of the 2004 Report (OECD, 2004b), where it says “the
Committee decided that where a regime is in the process of being eliminated
it shall be treated as abolished in the above table if (1) no new entrants are
permitted into the regime, (2) a definite date for complete abolition of the
regime has been announced, and (3) the regime is transparent and has
effective exchange of information”.
B. Improving transparency through compulsory spontaneous exchange
on rulings related to preferential regimes
1. Introduction
The second priority under Action Item 5 for revamping the work on
harmful tax practices is to improve transparency, including compulsory
spontaneous exchange on rulings related to preferential regimes. Seen in the
wider context of the work on BEPS, this requirement contributes to the third
pillar of the BEPS project, which is to ensure transparency while promoting
increased certainty and predictability. The work on this requirement is
intended to allow the FHTP to start applying the agreed transparency
framework according to the schedule set out under the heading
“i) Application and implementation of the framework” below and then
report on the status of the implementation and the time frame to complete it
in a FHTP 2015 progress report.
The lack of transparency in the operation of a regime, which is the third
key factor, will make it harder for the home country to take defensive
measures. Lack of transparency may arise in two broad contexts: (1) in the
way in which a regime is designed and administered, including favourable
application of laws and regulations, negotiable tax provisions, and a failure
to make administrative practices widely available; and (2) the existence of
provisions such as secrecy laws or inadequate ownership and other
information requirements that prevent (or would prevent) effective exchange
of information10. Issues around transparency often link into concerns around
exchange of information11.
There is extensive guidance in the CAN (OECD, 2004a) on
transparency. As the 1998 Report and the CAN make clear, transparency is
often relevant in connection with rulings, including unilateral Advance
Pricing Agreements (APAs) and administrative practices more widely,
where spontaneous notification may be required. This is brought out most
clearly in Chapter V of the CAN which deals with rulings12. Amongst “the
features which are likely to result in a lack of transparency”, the CAN refers
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to the situation “where the tax authority does not notify other tax authorities
on a timely and spontaneous basis of the existence of a ruling where the tax
authority is aware that it affects residents in the other country (e.g. an
advance tax ruling or unilateral APA that provides for a downward
adjustment that would not be directly reflected in the company's financial
accounts)”13.
Action Item 5 requires a renewed focus on transparency and explicitly
refers to “compulsory spontaneous exchange of information on rulings
related to preferential regimes”. The word “compulsory” is understood to
introduce an obligation to spontaneously exchange information wherever the
relevant conditions are met. The term “spontaneous exchange of
information” refers to a situation in which one country is aware of
information that could be of relevance to another country, but the
information has not been requested by the second country.
The FHTP has decided to take forward the work on improving
transparency in two steps:
1. The first step has focused on developing a framework for
compulsory spontaneous information exchange on rulings. This will
enable other countries to check whether a ruling has any
implications for the tax treatment of taxpayers in their country. This
framework is covered in more detail below.
The framework is intended to be dynamic and flexible and will be
further developed taking into account the second step of the
FHTP’s work on transparency (see below), the FHTP’s work on the
elaborated substantial activity requirement and the consideration by
the FHTP of possible revisions of, or additions to, the existing
framework under the third output of Action Item 5.
2. In the second step of the work, the FHTP will focus on the
application of the framework set out in this report to member and
associate countries’ preferential regimes. In the first instance, the
FHTP will develop practical guidance (with examples) on how the
framework is intended to operate and to aid implementation of the
framework. The intention is for the FHTP to start applying the
framework following the FHTP’s autumn meeting and to report on
this in a FHTP 2015 progress report.
As part of the second step of the work on transparency, the FHTP
will review ruling regimes in member and associate countries. In
this context, a ruling “regime” could be any legislative or
administrative process under which a ruling, on which a taxpayer is
entitled to rely, is granted. This work is intended to serve a dual
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purpose, i.e. (i) to identify ruling regimes that are themselves
harmful preferential regimes within the meaning of the 1998 Report
and (ii) to identify what ruling regimes trigger the obligation to
spontaneously exchange information.
On (i), ruling regimes have been an area of focus since the start of
the OECD’s work on harmful tax practices. Chapter V of the CAN
recognises that although rulings can be a useful tool for both tax
administrations and taxpayers, ruling regimes can also be used to
attract internationally mobile capital to a jurisdiction and they have
the potential to do this in a manner that contributes to, or constitutes
a harmful tax practice, as defined according to the factors in the
1998 Report14. The FHTP’s work on ruling regimes will therefore
consist of reviewing countries’ ruling regimes (whether they provide
general and/or taxpayer-specific rulings) against the factors in the
1998 Report, including the substantial activity requirement and
transparency factor as elaborated under Action Item 5. This may
result in ruling regimes themselves being found to be potentially
and, as the case may be, actually harmful15.
On (ii), ruling regimes that are found to be in themselves
preferential and that meet the filters set out in the framework below
will trigger the obligation to spontaneously exchange information
like any other preferential regime. The relevant regime will not have
to have been found to be potentially or actually harmful within the
meaning of the 1998 Report for that obligation to arise. The FHTP
will report on the review of countries’ ruling regimes in a FHTP
2015 Progress Report.
As part of the second step, the FHTP will explore whether there are
other ways in which transparency may be improved.
The work that will be carried out under the second step will also
consider the interaction with other BEPS Action Items in relation to
transparency to avoid unnecessary overlaps and creating an
additional administrative burden on countries.
The framework, as currently contemplated, only requires spontaneous
information exchange on taxpayer-specific rulings related to preferential
regimes, i.e. rulings that are specific to an individual taxpayer and on which
that taxpayer is entitled to rely. There is at present no such requirement for
general rulings, i.e. rulings that apply to groups or types of taxpayers or may
be given in relation to a defined set of circumstances or activities16.
One reason for not currently requiring spontaneous information
exchange of general rulings is that in the absence of a link between the
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ruling and a specific taxpayer to which the ruling applies, it would be very
difficult to determine with which country or countries information should be
exchanged. Spontaneous information exchange of general rulings with each
country with whom a relevant tax administration has an information
exchange relationship would impose a disproportionate administrative
burden and is unlikely to be very effective. In addition, general rulings
appear to pose less of a risk since they are often published and their
conditions of applicability will therefore be available. As general rulings are
not suitable for spontaneous exchange of information, the FHTP will
consider them separately under the second step of the work on transparency
which will consider the actual ruling regimes of member countries and
associate countries against the factors in the 1998 Report. This work will
also consider whether countries’ general ruling regimes are transparent and
will seek to establish best practices to ensure they are indeed available to
other countries.
2. Framework for compulsory spontaneous exchange on taxpayerspecific rulings related to preferential regimes
This section describes the framework developed by the FHTP for
compulsory spontaneous exchange on taxpayer-specific rulings related to
preferential regimes17. The framework seeks to find a balance between
ensuring that the information exchanged is relevant to other tax
administrations and that it does not impose an unnecessary administrative
burden on either the country exchanging the information or the country
receiving it.
The framework builds on the guidance contained in the CAN
and also takes into account the Convention on Mutual Administrative
Assistance in Tax Matters (MAC)18 and the European Union’s Council
Directive 2011/16/EU of 15 February 2011 on administrative cooperation in
the field of taxation (including its work on spontaneous information
exchange in the context of transfer pricing and on cross-border rulings).
These sources all have a common goal in that they seek to encourage
spontaneous information exchange in circumstances where it is assumed that
information obtained by one country will be of interest to another country.
This framework, whilst seeking to achieve a similar outcome, is, however,
focussed on the factors in the 1998 Report.
The framework deals with the following four key design questions:
1. When does the obligation to spontaneously exchange information on
rulings arise?
2. Who must information be exchanged with?
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3. What information must be exchanged?
4. What is the legal basis for the spontaneous information exchange?
The following issues are also dealt with: time limits for compulsory
spontaneous information exchange, relevance of reciprocity, confidentiality
of the information exchanged, when feedback from the receiving country is
appropriate and application and implementation of the framework.
a) When does the obligation to spontaneously exchange information
arise?
To ensure that the obligation to spontaneously exchange information is
sufficiently targeted, the framework applies a filter approach to determine
when such an obligation arises. The filter approach seeks to reduce the level
of discretion that would otherwise have to be used by a tax administration to
make that determination and instead uses more mechanical filters. The
flowchart contained in Annex A. visualises how these filters are intended to
work.
The first three filters limit the obligation to spontaneously exchange
information to rulings related to (i) preferential regimes that (ii) are within
the scope of work of the FHTP and that (iii) meet the no or low effective tax
rate factor. These are the normal filters that apply to identify those situations
in which an analysis of the other key factors and the other factors in the
1998 Report is necessary.19 If a ruling passes all of these three filters,
additional filters apply to further target the obligation to spontaneously
exchange information on rulings that are likely to be relevant to other
jurisdictions. Under the filter approach, as currently contemplated, only a
ruling that passes through all of the filters will be subject to compulsory
spontaneous information exchange.
The obligation to spontaneously exchange arises for rulings related to
any preferential regime. That is, a regime does not need to have been
reviewed or to have been found to be potentially or actually harmful within
the meaning of the 1998 Report for the obligation to arise. Therefore, the
obligation will also apply to any ruling (as defined) in connection with
preferential regimes that have not yet been reviewed or that have been
reviewed but that have not been found to be potentially or actually harmful
and that have therefore been cleared. As mentioned before, ruling regimes
that are in themselves preferential and that meet the filters set out in the
framework will trigger the obligation to spontaneously exchange
information like any other preferential regime.
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Countries that have preferential regimes that have not yet been reviewed
by the FHTP will need to self-assess whether the first three filters (and the
other filters) are satisfied. Where this is the case, the obligation to
spontaneously exchange information arises immediately, without the FHTP
first needing to formally review the relevant regime. The relevant country
will be expected to take a view on whether the first three filters (and the
other filters) are satisfied. In case of doubt as to the applicability of the
filters, it is recommended that the relevant country spontaneously exchange
information. The expectation is that a country that has a preferential regime
which has not yet been reviewed by the FHTP will in the meantime
self-refer this regime for review by the FHTP. Regimes that have been
reviewed by the FHTP and that have been found to meet the first three filters
will be added to a compilation to be occasionally updated by the FHTP. The
creation of the compilation will be undertaken as part of step two of the
FHTP’s work on transparency.
Filter 1: Is the regime within the scope of the FHTP’s work?
This filter limits the requirement to spontaneously exchange information
to rulings relating to preferential regimes that are within the scope of the
1998 Report. To be within the scope of the 1998 Report, the regime must,
firstly, apply to income from geographically mobile activities, such as
financial and other service activities, including the provision of
intangibles20. Secondly, the regime must relate to the taxation of the relevant
income from geographically mobile activities21.
Filter 2: Is the regime a preferential regime?
As stated in Action Item 5, the obligation to spontaneously exchange
information applies to rulings related to a preferential regime.
Chapter 3(a) above describes when a regime is considered to be preferential.
The words “related to” make clear that this obligation not only covers
rulings on a preferential regime itself or certain aspects of it but also, and
more broadly, rulings that concern matters that have an impact on the
application of a preferential regime.
Filter 3: Does the regime meet the no or low effective tax rate
factor?
This filter limits the obligation to spontaneously exchange information
to regimes meeting the no or low effective tax rate factor. A no or low
effective tax rate may arise because the tax rate itself is very low or because
of the way in which a country defines the tax base to which the rate is
applied22.
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Filter 4: Is there a taxpayer-specific ruling related to a regime
that meets the first three filters?
The obligation to spontaneously exchange information as mandated by
Action Item 5 applies to “rulings related to preferential regimes”. Chapter V
of the CAN deals specifically with rulings and defines them as:
“any advice, information or undertaking provided by a tax authority
to a specific taxpayer or group of taxpayers concerning their tax
situation and on which they are entitled to rely”23.
Whilst the terms of a ruling may be relied upon by the taxpayer, this is
typically subject to the condition that the facts on which the ruling is based
have been accurately presented and that the taxpayer abides by the terms of
the ruling. This definition is wide and would include both general rulings
and taxpayer-specific rulings. However, the framework, as currently
contemplated, only requires spontaneous information exchange on
taxpayer-specific rulings related to preferential regimes. The paragraphs
below explain in general terms what is understood by “general rulings” and
“taxpayer-specific rulings” and gives examples of taxpayer-specific rulings.
General rulings apply to groups or types of taxpayers or may be given
in relation to a defined set of circumstances or activities, rather than
applying to a specific taxpayer. They typically provide guidance on the
position of the tax authority on such matters as the interpretation of law and
administrative practice24 and on their application to taxpayers generally, to a
specified group of taxpayers or to specified activities. This guidance
typically applies to all taxpayers that engage in activities or undertake
transactions that fall within the scope of the ruling. Such rulings are often
published and can be applied by taxpayers to their relevant activities or
transactions without them needing to make an application for a specific
ruling.
Taxpayer-specific rulings are rulings that apply to a specific taxpayer
and on which that taxpayer is entitled to rely. Such rulings can be given both
pre- and post-transaction. Examples of taxpayer-specific rulings include
Advance Tax Rulings or clearances (ATRs) and APAs.
Advance Tax Rulings are specific to an individual taxpayer and provide
a determination of the tax consequences of a proposed transaction on which
the particular taxpayer is entitled to rely. Advance tax rulings may come in a
variety of forms and may include rulings or clearances that are given as part
of a statutory process or an administrative practice, including rulings that are
given informally. They frequently determine whether, and in some cases,
how, particular law and administrative practice will be applicable to a
proposed transaction undertaken by a specific taxpayer. Such rulings may
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also provide a determination of whether or how a general ruling applies to
the facts and circumstances of a particular taxpayer. Typically, the taxpayer
concerned will make an application for a ruling before undertaking the
transaction concerned, although some regimes provide guidance to
taxpayers after a transaction has been carried out and these post transaction
rulings will also be covered. The ruling will provide a determination of the
tax consequences of the relevant transaction on which the taxpayer is
entitled to rely, assuming that the facts are as described in the advance tax
ruling request. Such rulings are tailor-made for the taxpayer concerned as
they take into account the factual situation of the taxpayer and are thus not
directly applicable to other taxpayers. (Although, when published in
anonymised or redacted form, such rulings may provide guidance to
taxpayers with similar facts and circumstances25.) This category of ruling
could include for example rulings on transfer pricing matters that fall short
of an advance pricing arrangement. It may also include a view or
determination of the future tax treatment of the taxpayer on which they are
entitled to rely.
Advance Pricing Arrangements. An APA is defined in the
OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations (TP Guidelines, (OECD, 2010)) as “an arrangement that
determines, in advance of controlled transactions, an appropriate set of
criteria for the determination of the transfer pricing for those transactions
over a fixed period of time”26. They provide taxpayers with certainty about
how transfer pricing rules apply to future transactions within the scope of
the APA. They normally do this by determining an appropriate set of criteria
(e.g., method, comparables and appropriate adjustments thereto and critical
assumptions as to future events) for the determination of the transfer
The
pricing27.
TP Guidelines distinguish APAs from other rulings procedures, such as
advance tax rulings, in the following way:
“The APA differs from the classic ruling procedure, in that it
requires the detailed review and to the extent appropriate,
verification of the factual assumptions on which the determination
of legal consequences is based, before any such determinations can
be made. Further the APA provides for a continual monitoring of
whether the factual assumptions remain valid throughout the course
of the APA period”28.
APAs may be unilateral, bilateral or multilateral. Bilateral and
multilateral APAs are concluded between two or more tax authorities under
the mutual agreement procedure of the applicable tax treaties. Typically, the
associated enterprises applying for an APA provide documentation to the tax
authorities concerning the industry, markets and countries to be covered by
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4. REVAMP OF THE WORK ON HARMFUL TAX PRACTICES – 43
the agreement, together with details of their proposed methodology, any
transactions that may serve as comparables, and a functional analysis of the
contribution of each of the relevant enterprises. Because APAs govern the
methodology for the determination of transfer prices for future years, they
necessitate assumptions or predictions about future events.
Filter 5: Is the taxpayer-specific ruling a ruling in the area of
transfer pricing or another ruling?
To further target the obligation to spontaneously exchange information
on rulings, an additional filter distinguishes between rulings in the area of
transfer pricing and other rulings.
Filter 5(a): For transfer pricing rulings only – Is the ruling a
unilateral transfer pricing ruling or a bilateral or multilateral
APA?
This filter applies to rulings in the area of transfer pricing only. Transfer
pricing rulings include APAs (whether unilateral, bilateral or multilateral)
and ATRs on transfer pricing issues other than APAs. Such rulings generally
either determine transfer pricing issues between associated enterprises
engaging in cross-border transactions or the allocation of profits between a
head office in one country and a PE in another country. They are therefore
likely to have a direct effect on the tax base of associated enterprises, or of
the head office or PE, as the case may be, in other countries. In some
countries, unilateral APAs can also be obtained for domestic transactions.
Where this is the case, the obligation to spontaneously exchange information
would not arise in the absence of an affected country to spontaneously
exchange information with.
Without details of the relevant transfer pricing rulings, other
affected jurisdictions (see “b) Who must information be exchanged with?”)
will not be in a position to verify that those rulings are in accordance with
international transfer pricing principles and take any necessary steps to
protect their own tax base. Absent information exchange, details of transfer
pricing rulings will not normally be available to affected countries in the
case of:
•
Unilateral APAs, i.e. APAs established between a
administration of one country and a taxpayer in its country;
•
Bilateral and multilateral APAs but only in the case of any affected
country that has not been involved in the agreement of the APA;
and
•
ATRs (other than APAs) on transfer pricing issues.
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It is therefore important that the obligation to spontaneously exchange
information covers these types of rulings where they also meet the first four
filters. The first three filters require the transfer pricing ruling to relate to a
preferential regime that is within the scope of the FHTP’s work and meets
the no or low effective tax rate factor. The legislative or administrative
process under which a transfer pricing ruling on which a taxpayer is entitled
to rely is granted can under certain circumstances in itself be a preferential
regime. The work in the second step of the work on transparency is intended
to identify whether this is the case for any of the ruling regimes in place in
member countries and associate countries. The obligation to spontaneously
exchange information does not apply to bilateral or multilateral APAs in
respect of any country that has been involved in the agreement of the APA.
This is because the relevant tax administration should already be in
possession of the relevant information.
The practical guidance which will be developed by the FHTP in the
second step of its work on transparency will include examples on how filter
5(a) is intended to operate.
Filter 5(b): For rulings other than transfer pricing rulings only –
Does the ruling cover (i) inbound investment into the country in
which the taxpayer has obtained the ruling, (ii) outbound
investment from that country or (iii) transactions or a situation
involving other countries?
The cross-border nature of transfer pricing rulings and their likely direct
effect on the tax base of other countries, in and of themselves, should work
as an adequate filter for targeting rulings that are likely to be of relevance to
other countries. For rulings other than transfer pricing rulings, a further filter
is considered necessary to make sure that the information exchanged is
relevant and that the obligation to spontaneously exchange information on
rulings does not impose an unnecessary administrative burden on either the
country exchanging the information or the country receiving it.
As relevant cross-border transfer pricing rulings are covered by
filter 5(a), filter 5(b) applies to other rulings that could have a cross-border
aspect, i.e. rulings that cover (i) inbound investment into the country in
which the taxpayer has obtained the ruling, (ii) outbound investment from
that country or (iii) transactions or a situation involving other countries. The
practical guidance which will be developed by the FHTP in the second step
of its work on transparency will include examples on how this filter is
intended to operate.
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b) Who must information be exchanged with?
Compulsory spontaneous exchange on rulings related to preferential
regimes must take place with any affected country. This is closely linked to
the operation of filters 5(a) and (b). This could therefore include:
1. The source country;
2. The country of residence of the immediate parent company;
3. The country of residence of the beneficial owner, which in most
cases will be the ultimate parent company;
4. In the case of transfer pricing rulings:
− The country in which an associated enterprise engaged in a
cross-border transaction covered by the ruling is tax resident or
carries on a business through a PE;
− In the case of a ruling allocating profits between the head office
and a foreign PE, the country in which the head office is tax
resident or the country in which the PE is located, depending on
which country granted the ruling.
5. In the case of rulings other than transfer pricing rules:
− In the case of an inbound investment into the country in which
the taxpayer has obtained the ruling: the country in which the
party making the investment is resident or in which it carries on
a business through a PE;
− In the case of an outbound investment from the country in which
the taxpayer has obtained the ruling: the country in which the
party on the receiving end of the investment is resident or
carries on a business through a PE;
− In the case of transactions or a situation involving other
countries: the country in which the other party or parties to those
transactions is or are resident or carries or carry on a business
through a PE.
c) What information must be exchanged?
The information that must be exchanged spontaneously will depend on
whether or not the relevant ruling is a transfer pricing ruling.
If the ruling is not a transfer pricing ruling, it will be up to the sending
country to determine which information, for example the full text of the
ruling in the original language or any other material, would be considered
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useful. However, as a minimum, a short summary, preferably in English or
any other language bilaterally agreed, should be provided and should
include at least:
•
Information necessary to identify the taxpayer(s) and the
accounting periods covered by the ruling;
•
A summary of the issue(s), transactions and income covered by the
ruling; and
•
The tax administration’s response and reasoning. The name of the
responsible tax officials will not be disclosed.
In the second step of the work on transparency, the FHTP will explore what
further information should be contained in a sending country’s summary.
If the ruling is a transfer pricing ruling, there will be a two–stage
process. The first stage will involve the sending country spontaneously
exchanging sufficiently detailed information about the ruling so as to enable
the receiving country to decide whether a request for additional information
under the second stage is appropriate. To this end, the initial spontaneous
exchange should include at least:
•
Information necessary to identify the taxpayer(s) and the entities
involved in the cross border transaction covered by the ruling;
•
Detail of the transaction(s)/business activity/situation and the
period covered by the transfer pricing ruling; and
•
The transfer pricing methodology applied and the price/margin
agreed.
In the second step of the work on transparency, the FHTP will explore what
further information should be contained in the sending country’s initial
spontaneous exchange.
Both in the case of transfer pricing rulings and rulings other than
transfer pricing rulings, the sending country should provide all further
relevant information if there is a further request from the receiving country
under the relevant information exchange provisions.
The sending country will, however, need to consider provisions in the
relevant information exchange instrument on disclosure of any trade,
business, commercial or other secrets and the expectation that
information exchanged under the framework remains confidential
(see “h) Confidentiality of the information exchanged”).
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d) What is the legal basis for information exchange?
Information exchange between tax authorities requires a framework
legally enabling the sending country to exchange the information and the
recipient country to receive it. Some form of enabling legal instrument is
therefore needed. There are a number of international legal instruments on
the basis of which spontaneous information exchange for tax purposes may
take place, including:
•
The relevant bilateral information exchange instruments;
•
International instruments designed specifically for administrative
assistance purposes in tax matters, such as the MAC; and,
•
Within the European Union, Council Directive 2011/16/EU of
15 February 2011 on administrative cooperation in the field of
taxation.
Domestic law provisions may also provide the relevant legal basis in
some countries.
Countries that currently do not have the necessary legal framework in
place for spontaneous information exchange will need to consider ways of
putting such a framework in place to comply with their obligation under
Action Item 5. This may involve signing the MAC. The framework
described above is supported by the breadth of Article 7 of the MAC.
Countries may also consider revising existing bilateral information exchange
instruments (such as bilateral tax conventions or tax information exchange
instruments). Entering into a competent authority agreement under the
relevant information exchange instrument may also assist.
e) Time limits for compulsory information exchange
The effectiveness of information exchange very much depends on the
timeliness of the information exchanged. For that reason, a country that has
provided a ruling that is subject to the obligation to spontaneously exchange
information under Action Item 5 must exchange the relevant information on
that ruling with any affected country as quickly as possible and no later than
3 months after that in which the ruling becomes available to the competent
authority of the country that has granted the ruling. The recommendation is
that the relevant authorities within the country that has granted the ruling
transmit that ruling to their competent authority without undue delay.
Countries need to ensure they have an appropriate system in place to ensure
they are in a position to do so.
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f) Feedback
Regular, timely and comprehensive feedback on the usefulness of the
information spontaneously exchanged enables improvements to be made for
future spontaneous information exchanges29. From the perspective of the
sending country, feedback can also be useful as it may result in a tax
adjustment for the sending country30. Therefore, if the sending country has
requested feedback from the receiving country, the competent authority of
the receiving country should request feedback from the relevant authorities
in its country on the usefulness of the information spontaneously exchanged
and forward this information to the competent authority that spontaneously
provided the information.
g) Reciprocity
There are a number of benefits associated with a reciprocal approach to
exchange of information. However, the benefits of reciprocity do not appear
to have any relevance where the legal system or administrative practice of
only one country provides for a specific procedure. Accordingly, a country
that has granted a ruling that is caught by the obligation to spontaneously
exchange information cannot invoke the lack of reciprocity as an argument
for not spontaneously exchanging information with an affected country,
where the affected country does not grant, and therefore cannot exchange,
rulings which could potentially trigger the obligation to spontaneously
exchange information31. This assumes of course that the affected country is
committed to applying the framework and to spontaneously exchanging
information if it were to grant rulings which trigger the obligation to
spontaneously exchange information.
h) Confidentiality of the information exchanged
Both the country exchanging information and its taxpayers have a legal
right to expect that information exchanged pursuant to the framework
remains confidential. The receiving country must therefore have the legal
framework necessary to protect information exchanged.
All treaties and exchange of information instruments contain provisions
regarding tax confidentiality and the obligation to keep information
exchanged confidential. Under those provisions, information may only be
used for certain specified purposes and disclosed to certain specified
persons. Information exchange partners may suspend or limit the scope of
the exchange of information if appropriate safeguards are not in place or if
there has been a breach in confidentiality and they are not satisfied that the
situation has been appropriately resolved.
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4. REVAMP OF THE WORK ON HARMFUL TAX PRACTICES – 49
Domestic laws must be in place in the receiving country to protect
confidentiality of tax information, including information exchanged.
Effective penalties must apply for unauthorised disclosures of confidential
information exchanged.
Information exchanged pursuant to this framework may be used only for
tax purposes or other purposes permitted by the relevant information
exchange instrument. If domestic law allows for a broader use of the
information than the applicable information exchange instrument, it is
expected that international provisions and instruments will prevail over
provisions of domestic law.
i) Application and implementation of the framework
The intention is for the FHTP to start applying the framework following
the FHTP’s autumn meeting and to report on the status of the
implementation and the time frame to achieve it in a FHTP 2015 Progress
Report. Countries that do not (yet) have the necessary legal framework in
place to spontaneously exchange information as required by Action Item 5
will be given an adjustment period following which the continued lack of
the necessary legal framework will result in the elaborated transparency
factor being triggered. Recognising differences in countries’ legislative and
parliamentary processes and that the introduction of a legal framework may
take some time, member and associate countries will be given until the end
of 2014 to initiate steps to put in place that legal framework to be able to
spontaneously exchange information.
An ongoing monitoring and review mechanism will be put in place to
ensure countries’ compliance with the obligation to spontaneously exchange
information under Action Item 5. This will involve an annual review by the
FHTP. To that end and once a year, countries that provide taxpayer-specific
rulings that fall within the framework will be expected to provide statistical
information. As a minimum, this will include (a) the total number of
spontaneous exchanges sent under the framework; (b) the number of
spontaneous exchanges sent on non-transfer pricing rulings; (c) the number
of spontaneous exchanges sent on transfer pricing rulings; and (d) for each
exchange, which country or countries information was exchanged with.
In the second step of the work on improving transparency, which
commences following the publication of this report, the FHTP will identify
what further information may assist countries in assessing whether a country
has complied with its obligation under the framework. This information
could include the total number of taxpayer-specific rulings related to
preferential regimes they have granted (this number would include rulings
that have not been spontaneously exchanged under the framework) and an
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estimate of taxes involved. Further work will be done on how this should be
measured and reported.
Notes
1.
See p. 17 of the BEPS Action Plan. See also Chapter 1 above.
2.
Jurisdictions with IP regimes should ensure that the same IP asset is not
allocated to both the head office and the foreign PE (e.g., because they
apply the Authorised OECD Approach (AOA)).
3.
Jurisdictions may also choose to modify the nexus approach slightly so
that the nexus is between expenditures, products arising from IP assets,
and income. Such an approach would require taxpayers to adjust the
ratio to include all qualifying expenditures from all IP assets that
contributed to the product in “qualifying expenditures” and to include all
overall expenditures from all IP assets that contributed to the product in
“overall expenditures”. This aggregate ratio would then be applied to
overall income from the product that was directly linked to all the
underlying IP assets. This approach would be consistent with the nexus
approach and may reduce compliance costs for certain taxpayers with
multiple patents that contribute to one product, but jurisdictions must
ensure that this product-based approach requires the same level of
tracking as a patent-based approach and that benefits expire at a fair and
reasonable time (e.g., the average life of all patents). The FHTP will
develop further guidance on this approach.
4.
Qualifying expenditures could therefore include salary and wages, direct
costs, overhead costs, cost of supplies, and depreciation (not including
depreciation or amortization of acquisition costs) so long as all of these
costs arise out of activities undertaken to advance the understanding of
scientific relations or technologies, address known scientific or
technological obstacles, or otherwise increase knowledge or develop
new applications.
5.
This means that general and speculative R&D can be included in
qualifying expenditures so long as taxpayers can show that there is a
direct link between the R&D and the IP asset that was produced. It also
means that building costs or other non-separable capital costs would not
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4. REVAMP OF THE WORK ON HARMFUL TAX PRACTICES – 51
be included because it would be impossible to establish a direct link
between the cost of an entire building and different IP assets created in
that building.
6.
IP expenditures will be calculated by applying the ordinary domestic tax
law provisions (i.e., not using specific provisions in IP regimes).
7.
Spain and the UK maintained a reservation with regards to Section F.
8.
Jurisdictions that are not member states of the European Union could
modify this limitation to include all qualifying expenditures for activities
undertaken by both unrelated parties and resident related parties in the
definition of qualifying expenditures.
9.
Outsourcing is different from the buying in of components from a party
that owns the IP to those components, and this reference to the
likelihood of outsourcing to unrelated parties does not refer to the
likelihood of buying components from unrelated parties.
10.
See Box II and paragraph 63 of 1998 Report and paragraph 18 of the
CAN.
11.
See, for example, paragraph 66 of 1998 Report which states that:
“Exchange of information may be a constraint in situations where a
non-transparent regime allows the tax administration to give a prior
determination to an individual taxpayer and where that tax authority
does not inform the foreign tax authority affected by such a decision.
This failure to notify the foreign tax authority may curtail the ability of
that tax authority to enforce effectively its rules”.
12.
For the purposes of Chapter V of the CAN, a ruling is defined to be
“any advice, information or undertaking provided by a tax authority to
a specific taxpayer or group of taxpayers concerning their tax situation
and on which they are entitled to rely” (see paragraph 161 of the CAN).
The definition is wide and includes general rulings, advance tax rulings
and advance pricing arrangement. However, the chapter applies only to
rulings covering activities within the scope of the 1998 Report
i.e., geographically mobile activities, such as financial and other service
activities, including the provision of intangibles.
13.
See the Box on p. 53 of the CAN (which is in the section containing
general guidance on ruling regimes). See also the Box on p. 58 (which is
in the section containing guidance on ATRs specifically) and the Box on
p. 60 of the CAN (which is in the section containing guidance on APAs
specifically).
14.
See paragraph 168 of the CAN.
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15.
As explained earlier, where a preferential regime has been found to be
actually harmful, the relevant country is given the opportunity to abolish
the regime or remove the features that create the harmful effect. Other
countries may take defensive measures to counter the effects of the
harmful regime, while at the same time continuing to encourage the
country applying the regime to modify or remove it.
16.
General rulings can in the meantime of course continue to be exchanged
under the relevant information exchange provisions.
17.
For the avoidance of doubt, other spontaneous information exchanges
and other forms of information exchange are unaffected by the
framework and can of course continue to take place under the relevant
information exchange provisions.
18.
For information on the MAC, see:
www.oecd.org/tax/exchange-of-taxinformation/conventiononmutualadministrativeassistanceintaxmatters.ht
m.
19.
The three-stage process for determining whether a regime is harmful is
explained in Chapter 3.
20.
See Chapter 3(a).
21.
See Chapter 3(b) for a brief explanation of what taxation the FHTP’s
work is concerned with and Chapter 5, Section B for a further
explanation of when sub-national taxes are within the scope of the
FHTP’s work.
22.
See paragraph 61 of the 1998 Report.
23.
See paragraph 161 of the CAN for the definition of “ruling”.
24.
Law and administrative practice includes statutory law (including
relevant treaty provisions), case law, regulations, administrative
instructions and practice.
25.
In their anonymised or redacted form, such rulings fall within the
category of “general rulings”, unless they are in fact written in response
to a taxpayer-specific ruling request. Of course, in their nonanonymised, non-redacted form, such rulings fall within the category of
“taxpayer-specific rulings”.
26.
APAs may determine the attribution of profit in accordance with
Article 7 of the OECD Model Tax Convention as well as transfer pricing
between associated enterprises. Such APAs would also fall within the
scope of the definition of “ruling” for the purposes of the obligation to
spontaneously exchange on rulings.
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27.
See the definition of APA in the first sentence of paragraph 4.123 of the
TP Guidelines.
28.
See paragraph 3 of the Annex to the TP Guidelines.
29.
See paragraph 5 of the Manual on Exchange of Information, Module 2 Spontaneous Information Exchange (OECD, 2006).
30.
See paragraph 18 of the Manual on Exchange of Information, General
Module - General and Legal Aspects of Exchange of Information.
31.
See paragraph 15.1 of the 2014 Update to the OECD Model Tax Convention
(OECD, 2014) which sets out the principle in the context of information
exchange on request.
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http://dx.doi.org/10.1787/9789264162945-en
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5. REVIEW OF MEMBER AND ASSOCIATE COUNTRY REGIMES – 55
Chapter 5
Review of member and associate country regimes
A. Introduction
The current review of member country regimes commenced in late 2010
with the preparation of a preliminary survey of preferential tax regimes in
member countries, based on publicly available information and without any
judgment as to the potential harmfulness of any of the regimes included.
Further regimes were subsequently added to the review process based on
member countries’ self-referrals and referrals by other member countries.
Each member country was requested to provide a description of its
regimes, along with a self-review using a standard template. The
self-reviews were followed by extensive analysis and peer reviews. The
reviews were based on the principles and factors set out in the 1998 Report
(OECD, 1998) and, where necessary, relevant economic considerations. As
the current review commenced before the publication of the BEPS Action
Plan (OECD, 2013), all of the regimes (with the exception of intangible
regimes) have been assessed against the factors as previously applied so that
there is a consistent approach applied to similar types of regimes such as
those for holding companies.
As all the intangible regimes of member countries are being considered
together, they are being considered not only in light of the factors as
previously applied but also in light of the elaborated substantial activity
factor. As intangible regimes are just a subset of preferential regimes, the
FHTP will also need to discuss and subsequently apply the substantial
activity requirement to other preferential regimes; this could include
preferential regimes already reviewed provided that they are still in force
and not abolished.
Action Item 5 also requires the FHTP, as a priority, to improve
transparency. Therefore regimes, including the intangible regimes, may also
subsequently need to be reconsidered in the light of the analysis in this
respect.
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REVIEW OF MEMBER AND ASSOCIATE COUNTRY REGIMES
The review of preferential regimes of associate countries commenced in
late 2013. The review followed the same process, and was carried out on the
same basis, as that for the review of member country regimes. The review of
the preferential regimes of Colombia and Latvia has been started but not
finalised. The finalisation of the review of preferential regimes of other
associate countries is part of the FHTP’s next steps (see Chapter 6 below).
The FHTP’s work on preferential regimes in member and associate
countries is an ongoing process which will continue beyond September
2014. This process permits any member and associate country to request at
any time a review of any existing preferential tax regime to the extent it
considers that the nature of the regime, its economic effects or the extent and
manner of its use have changed in ways that may make it harmful within the
meaning of the 1998 Report. Regimes will also be subject to review under
the elaborated substantial activity and transparency factors.
B. Conclusions on sub-national regimes and when they are in scope
In the course of the current review, the question arose as to whether
sub-national regimes offering tax benefits at sub-national level alone are
within the scope of the FHTP’s work. Given that the no or low effective tax
rate gateway factor looks at the combined effective tax rate for both the
national and sub-national levels, a sub-national regime will fall outside the
scope of the FHTP’s work where the tax rate at the national level or the subnational level fails to meet the no or low effective tax factor on its own.
The 1998 Report does not, however, preclude sub-national regimes from
the FHTP’s scope of work as a matter of principle, and there is nothing in
the history of the FHTP’s work precluding sub-national regimes from the
scope of its work. In addition, it would be inconsistent with the
1998 Report’s broader objective of establishing a “level playing field” 1 to
exclude regimes offering tax benefits at the sub-national level alone from
the scope of the FHTP’s work, particularly where the tax rate at sub-national
level represents (or could represent, in the case of a discretionary tax rate) a
significant portion of the combined effective tax rate. Bearing this in mind,
the FHTP agreed to include sub-national regimes within the scope of its
work where both of the following two criteria are satisfied:
i.
The national government is ultimately responsible for the general
design of the relevant regime and leaves limited discretion to the
sub-national government as to whether or not to introduce the
regime and/or as to the key features of the regime. The rationale is
that in such a case, there is no fundamental difference between the
relevant regime and regimes enacted and administered at national
level; and,
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5. REVIEW OF MEMBER AND ASSOCIATE COUNTRY REGIMES – 57
ii.
The tax rate at sub-national level represents (or could represent, in
the case of a discretionary tax rate) a significant portion of the
combined tax rate and the combined effective tax rate for both the
national and sub-national levels meets the no or low effective tax
factor.
C. Conclusions reached on regimes reviewed
The review process of the FHTP includes the following 30 preferential
regimes. The tables below identify the country and the name of the regime
and provide the conclusion reached on certain regimes that the FHTP has
agreed are not harmful2.
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REVIEW OF MEMBER AND ASSOCIATE COUNTRY REGIMES
Table 5.1. Regimes other than intangible regimes
Country
1.
Australia
2.
Canada
3.
Colombia
4.
Greece
5.
Japan
6.
Japan
7.
Latvia
8.
Latvia
9.
Luxembourg
10.
Luxembourg
11.
Switzerland – Cantonal
level
12.
13.
14.
15.
Switzerland – Cantonal
level
Switzerland – Cantonal
level
Switzerland – Federal
level
Turkey
Regime
Conduit foreign income
regime
Life insurance business
regime
Foreign portfolio investment
regime
Offshore engineering and
construction
Special zones for
international competitiveness
development
Measures for the promotion
of research and development
Shipping taxation regime
Special economic zone
regime
Private asset management
company (Société de gestion
de patrimoine familial)
Investment Company in Risk
Capital (Société
d’investissement en capital à
risque) regime
Auxiliary company regime
(previously referred to as
domiciliary company regime)
Conclusion
Not harmful
Potentially harmful but
not actually harmful
3
Not harmful
Under review
4
Not harmful
Not harmful
Not harmful
5
Under review
Not harmful
6
Not harmful
7
Under review
Mixed company regime
Under review
Holding company regime
Under review
Commissionaire ruling
regime
Shipping regime
Under review
Not harmful
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5. REVIEW OF MEMBER AND ASSOCIATE COUNTRY REGIMES – 59
Table 5.2. Intangible regimes
Country
16.
Belgium
17.
Colombia
18.
France
19.
Hungary
20.
Israel
21.
Luxembourg
22.
Portugal
23.
Netherlands
24.
Spain
25.
Spain – Basque Country
26.
Spain – Navarra
27.
Switzerland
28.
Switzerland – Canton of
Nidwalden
29.
Turkey
30.
United Kingdom
Regime
Patent income deduction
Software regime
Reduced rate for long term
capital gains and profits from
the licensing of IP rights
IP regime for royalties and
capital gains
8
Preferential company
Partial exemption for
income/gains derived from
certain IP rights
Partial exemption for income
from certain intangible
property
Innovation box
Partial exemption for income
from certain intangible
assets
Partial exemption for income
from certain intangible
assets
Partial exemption for income
from certain intangible
assets
Relief for newly established
9
or re-designed enterprises
Conclusion
See the paragraph
following this table.
Licence box
Technology development
zones
Patent box
The IP regimes listed in Table 5.2 were all considered under the criteria
in the 1998 Report and are still only under review with respect to the
elaborated substantial activity factor.
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REVIEW OF MEMBER AND ASSOCIATE COUNTRY REGIMES
Table 5.3. Rulings related to preferential regimes and ruling regimes
Country
Regime
Conclusion
The FHTP plans to start applying the framework for compulsory spontaneous exchange on
rulings related to preferential regimes following the FHTP’s autumn meeting and then report on
the status of the implementation and the time frame to achieve it in a FHTP 2015 progress
report. All preferential regimes will need to be considered in the light of the elaborated
transparency factor which includes the framework. The conclusions on regimes assessed under
the elaborated transparency factor will then be included in this table.
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5. REVIEW OF MEMBER AND ASSOCIATE COUNTRY REGIMES – 61
Notes
1.
See paragraph 8 of the 1998 Report.
2.
A finding that a preferential regime was not harmful does not preclude a
future re-assessment of the regime under the factors as elaborated under
Action Item 5. Any such re-assessment would occur as part of the future
work outlined in Chapter 6.
3.
This conclusion was reached by the FHTP without reaching any
conclusion that Colombia’s regime was within the scope of the work of
the FHTP.
4.
This regime was considered prior to the approval of the BEPS Action
Plan.
5.
The FHTP has not yet reached a conclusion as to whether the regime is
within the scope of the work of the FHTP.
6.
This conclusion was reached by the FHTP without reaching any
conclusion that Luxembourg’s regime was within the scope of the work
of the FHTP.
7.
Switzerland has announced its intention to abolish this regime (as well
as the following three regimes) as part of its Third Corporate Tax
Reform.
8.
Israel’s preferred company regime was only included in the review to
the extent that it offers a preferential treatment for certain income from
qualifying intangible property.
9.
Switzerland’s relief for newly established or re-designed enterprises was
only included in the review to the extent that it offers a preferential
treatment for certain income from qualifying intangible property.
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
62 – 5.
REVIEW OF MEMBER AND ASSOCIATE COUNTRY REGIMES
Bibliography
OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD
Publishing.
http://dx.doi.org/10.1787/9789264202719-en
OECD (1998), Harmful Tax Competition: An Emerging Global Issue,
OECD Publishing.
http://dx.doi.org/10.1787/9789264162945-en
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
6. NEXT STEPS – 63
Chapter 6
Next steps
Going forward, the FHTP will complete the work under the first output
of Action Item 5 and commence work on the second output, i.e. engaging
with other non-OECD member countries on the basis of the existing
framework. The deadline for the delivery of the second output is September
2015 and the goal is to achieve a level playing field and avoid the risk of the
work on harmful tax practices displacing regimes from OECD member and
associate countries to other countries, giving them an unwarranted
competitive advantage and limiting the effectiveness of the whole exercise.
The completion of the work under the first output under Action Item 5
will consist of the following:
1) Further work on substantial activity
The work on substantial activity can be seen as occurring in three
stages. Firstly, discussions on the approach to require substantial activity in
IP regimes are continuing. Secondly, once an approach is agreed, it will be
applied to the IP regimes listed in Table 5.2 above, as well as other associate
country IP regimes. Lastly, Action Item 5 requires there to be substantial
activity in “any preferential regime” and therefore any agreed approach
needs to extend beyond IP regimes. While the ongoing discussions on
substantial activity in the context of intangible regimes may inform this
work, the requirement may need to be articulated differently in the context
of different preferential regimes since any substantial activity requirement
must reflect the nature of the preferential regime being assessed. Regimes
which have already been assessed may need to be re-assessed once the
articulation of the requirement has been agreed.
2) Further work on improving transparency
The FHTP will continue work on the application of the framework for
compulsory spontaneous information exchange on rulings to member and
associate countries’ preferential regimes, with a view to starting to apply the
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
64 – 6.
NEXT STEPS
framework following the FHTP’s autumn meeting and to reporting on this in
a FHTP 2015 Progress Report. The FHTP will also explore in what other
ways transparency may be improved.
3) Further work on the review of preferential regimes of associate
countries
The review of preferential regimes of associate countries will continue.
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
If the ruling is
not a transfer
pricing ruling
Domestic
context
Cross-border
context
Requirement to spontaneously exchange
information with affected country.
Yes
COUNTERING HARMFUL TAX PRACTICES MORE EFFECTIVELY © OECD 2014
No requirement to spontaneously exchange
information.
No
Bilateral/
multilateral
APA?
Requirement to spontaneously exchange
information only with affected country not
involved in the agreement of the APA.
If the ruling is a
transfer pricing
ruling
Unilateral
transfer pricing
ruling?
Yes
4. Is there a taxpayer-specific ruling related to a regime that meets the first
three filters?
Yes
3. Does the regime meet the no or low effective tax rate factor?
Yes
2. Is the regime a preferential regime?
Yes
1. Is the regime within the scope of the FHTP’s work?
Inbound investment into, outbound
investment out of, country granting
ruling or transactions or
situation
involving other jurisdictions?
No
No
No
No
Annex A. Spontaneous information exchange on rulings related to preferential regimes – flow chart
ANNEX A. SPONTANEOUS INFORMATION EXCHANGE ON RULINGS RELATED TO PREFERENTIAL REGIMES – FLOW CHART – 65
ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
The OECD is a unique forum where governments work together to address the
economic, social and environmental challenges of globalisation. The OECD is also at the
forefront of efforts to understand and to help governments respond to new developments
and concerns, such as corporate governance, the information economy and the challenges of
an ageing population. The Organisation provides a setting where governments can compare
policy experiences, seek answers to common problems, identify good practice and work to
co-ordinate domestic and international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, Chile, the
Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland,
Israel, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland,
Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the United Kingdom
and the United States. The European Union takes part in the work of the OECD.
OECD Publishing disseminates widely the results of the Organisation’s statistics gathering
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guidelines and standards agreed by its members.
OECD PUBLISHING, 2, rue André-Pascal, 75775 PARIS CEDEX 16
(23 2014 27 1 P) ISBN 978-92-64-21885-7 – 2014-01
OECD/G20 Base Erosion and Profit Shifting Project
Countering Harmful Tax Practices More
Effectively, Taking into Account Transparency
and Substance
Addressing base erosion and profit shifting is a key priority of governments around the
globe. In 2013, OECD and G20 countries, working together on an equal footing, adopted
a 15-point Action Plan to address BEPS. This report is an output of Action 5.
Beyond securing revenues by realigning taxation with economic activities and value
creation, the OECD/G20 BEPS Project aims to create a single set of consensus-based
international tax rules to address BEPS, and hence to protect tax bases while offering
increased certainty and predictability to taxpayers. A key focus of this work
is to eliminate double non-taxation. However in doing so, new rules should not result
in double taxation, unwarranted compliance burdens or restrictions to legitimate
cross-border activity.
Contents
Executive summary
Chapter 1. Introduction and background
Chapter 2. Overview of the OECD’s work on harmful tax practices
ramework under the 1998 Report for determining whether a regime
Chapter 3. F
is a harmful preferential regime
Chapter 4. Revamp of the work on harmful tax practices
Chapter 5. Review of member and associate country regimes
Chapter 6. Next steps
Annex A. S
pontaneous information exchange on rulings related to preferential
regimes – flow chart
www.oecd.org/tax/beps.htm
Consult this publication on line at http://dx.doi.org/10.1787/9789264218970-en.
This work is published on the OECD iLibrary, which gathers all OECD books, periodicals and
statistical databases.
Visit www.oecd-ilibrary.org for more information.
isbn 978-92-64-21885-7
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